Search This Blog

Saturday, July 14, 2012

Compulsory Kiwisaver or not?

Compulsory Kiwisaver (KS) is arguably a mechanism by which the least advantaged members of society will benefit in the long term, however, it has the inherent capability of making them suffer in the interim with no betterment for society in general. The Retirement Commission proposes that in order for KS to provide adequate cover for retirement, workers will need to contribute at least 10% of their incomes to make ends meet at retirement. For those low income earners with a student loan, the total compulsory deductions taken from their income will be 41.2% since the new payback rate for a SL is 12% and the PAYE tax rate for those who earn between $14K - $48K is 19.2% (which includes the ACC levy). These deductions will have a significant impact on low income earners while they work providing them with the barest of security at retirement.

Let me be clear, saving for retirement is not in itself a bad thing – but in my opinion the current structure of KS does not provide a great benefit to NZ as a whole and if it is to become compulsory, then it should have a wide ranging benefit since the levels at which we will be expected to contribute are significant.

The argument for compelling KS is that we will be better off. But will we? Could we do better? In my view, there are other options. Whilst I do not profess to be an expert at finance I would rather see a scheme where our contributions benefited society as opposed to propping up private corporations.  If KS was a government owned and operated fund our contributions would not be wasted on fees for private fund managers and propping up private interests and could instead be used to develop new SOE’s that could provide a solid dividend stream for the KS fund. In practice, I accept that this might be a bogus idea since I know next to nothing about finance and investment, but why are we so busy propping up private companies when we could be investing and getting a return on our contributions through a fund that contributes the betterment of NZ by providing local economic growth?

Additionally, by having a scheme that is owned by the people, we can influence policy as to how those funds are to be managed. Whilst we may be able to use the fund to develop SOE’s we might even be able to develop a scheme whereby any first time home buyer could withdraw a certain amount of their contributions as a deposit for a first home purchase. Home ownership has been a highly successful mode of preventing poverty in pensioners and we cannot just look at the income we will receive at retirement age, but must also consider the security of home ownership  In his book ‘Daylight Robbery’(2011), Ian Wishart makes the valid point that home ownership is more valuable to those at retirement age since around 80% of pensioners own their homes mortgage free, while only 3% are officially in poverty (2011, p.204). Additionally, that as was reported in the NZ Herald by Diana Crossan “Compelling us to divert more income to fund managers would put the Kiwi dream of home ownership out of reach of even more young New Zealanders” and proposed that perhaps the government consider ways of helping more young New Zealanders into home ownership (p.204).

The current KS scheme does some work to this effect; but it has an income threshold that precludes those who earn over the threshold from accessing their own funds for this purpose. This is, for lack of a better word, bonkers. How can a person be deprived of access to their own money to purchase a first home simply because they earn above the threshold? Did the government foresee how expensive it was to buy property these days? For instance in Auckland, the average home costs around half a million to purchase, and that’s just for a piece of crap with a courtyard if you want to live nearer the city, and a rundown hardy plank home with slightly more land if you want to live on the outskirts of Auckland.

So my point is essentially this, whilst KS could provide a benefit to all New Zealander’s, the current scheme simply operates to the benefit of private corporations and  provides those on low incomes with the barest of security for retirement. If KS becomes compulsory under its current structure, then it is an absolute dog. But if KS were used in a more innovative way for improving economic growth domestically, and considering the wider economic positions of pensioners, then we may stand a chance when we get to retirement age, and we might just be able to hold on to that kiwi dream of home ownership.